10 common tax time mistakes made by SMEs and how to avoid them

Every year, more than 3.2 million small businesses employing 5.5 million people face the prospect of preparing for tax time, according to figures from the Australian Taxation Office.

No doubt, you’re one of these small businesses contacting your accountant to ensure you’re prepared for a new financial year.

Be sure to ask your accountant about your estimated tax liability before the end of the financial year so you have funds set aside to pay your tax bill, advises Jenny Thai of Sydney accounting firm JTR & Associates.

“Your accountant can assist with tax planning so that tax is minimised legally,” she says.

We’ve compiled some of the common tax mistakes made by small businesses so you’re adequately prepared:

1. Not being prepared for Single Touch Payroll

Mistake: Not understanding the implications of Single Touch Payroll should be a concern for SMEs, because it will affect ALL employers. SMEs will need to be prepared from July 1, 2019.

Solution: Single Touch Payroll (STP) is a new way of reporting tax and super information to the Australian Taxation Office. Employers will need a payroll or accounting software that offers STP reporting so you can send your employees’ tax and super information to the ATO each time you run your payroll and pay employees.

Mark Chapman, Director of Tax Communications at H&R Block says “no matter how few team members you employ (even one or two), the STP rules will impact you, even if you don’t currently use a payroll software package. To help small employers, the ATO is preparing a number of measures to ease the burden including asking software developers to build low-cost STP solutions at or below $10 per month for micro employers – including simple payroll software, mobile phone apps and portals.

They also promise exemptions to businesses with no or limited internet connectivity and an option for employers with up to four employees to allow your accountant to report quarterly on your behalf (rather than at the time of each payroll).

If you are an affected business – and remember every employer with less than 20 employees are affected – you should talk to your tax or BAS agent now to get advice on your next move.”

2. Not revising your business structure regularly

Mistake: Many small business owners don’t have the right business structure in place, which can have major tax implications.

Solution: If you didn’t seek advice when you started, get some now to see if you are still operating in the best business structure for your situation. For example, you may have started out operating as a sole trader, but after a period of growth, you might be better off moving to a company. Be sure to revisit your business performance and business structure with your accountant so that your tax and succession options aren’t limited.

Thai says: “An accountant can let you know if you need to change structures to minimise or reduce your structures.”

Mark Chapman says “there are now tax exemptions available that allow small businesses to restructure essentially free of tax, for example if you started out as a sole trader, you can look at transferring your business into a trust or company tax free. That can help your business grow and can help protect your personal assets from business risks”.

3. Having one bank account for everything

Solution: Small business owners try and keep things simple by having one bank account for both personal and business expenses, but accountants recommend keeping business and personal accounts separate for more accurate record-keeping and to avoid tax issues where business money is drawn out for private use.

4. Carrying bad debt

Mistake: Small business owners often hold out hope that the outstanding invoice from a few months ago may still be paid as they approach the end of the financial year.

Solution: If repeated attempts to have the invoice paid have failed, it’s time to write the debt off so you can move into the new financial year fresh.

Writing off bad debt before June 30 means that only genuinely recoverable debts will be treated as taxable income. It also means you won’t be paying GST on money you haven’t received.

5. Not recording smaller deductions throughout the year

Mistake: Small business owners often don’t keep track of small amounts, which is a mistake given they add up over the course of a year.

Solution: There are a number of ways you can reduce the amount of time spent collating receipts to enter into spreadsheets. Look for a simple solution such as downloading an automated receipt collection app such as ReceiptBank or SquirrelStreet to ensure all deductions are recorded throughout the year – even the smaller ones.

Don’t forget to claim any professional development you’ve undertaken throughout the financial year, along with professional memberships and any business-related travel expenses.

Don’t forget to claim for any courses you’ve done throughout the financial year, as well as professional memberships and any business-related travel expenses.

6. Overlooking tax and employee obligations

Mistake: Not regularly putting aside money for PAYG, BAS or other taxes.

Solution: Set up a separate bank account to put aside money regularly for your tax and employee obligations. That way you will never be behind in these payments. Your accountant will be able to calculate how much you’re likely to owe based on your earnings.

Chapman says “particularly if you are starting a new business it can be easy to forget to put aside money for income tax and GST. Getting into debt with the ATO is a common cause of business failure so managing your cash flow to ensure money is available to pay your taxes is essential”.

7. Not paying correct entitlements

Mistake: Not paying employees under the correct employment category.

Solution: Make sure you understand the definition of full-time, casual, contractor or freelance arrangements to avoid penalties so you can pay the correct award and holiday and leave entitlements. The minimum superannuation you must pay is called the Super Guarantee, which is currently 9.5 per cent of an employee’s ordinary time earnings.ck.

Chapman says “just because you hire a contractor or freelancer doesn’t mean you avoid paying superannuation on their behalf. Staff in “employee-like” roles can have similar entitlements to actual employees. Check with your accountant if you’re not sure about your obligations to staff”.

Making sure that employees are also paid under the correct award and superannuation rate is also paramount, and that holiday and leave entitlements are up to date.

8. Poor record keeping

Mistake: Persisting with spreadsheets and paper receipts for business records.

Solution: Speak to your accountant about the best accounting program for your small business so you can seamlessly track both incoming and outgoing expenses. This also makes it much easier for your accountant to access your accounts to lodge your BAS if required throughout the year.

9. Spending for the wrong reasons

Mistake: Buying assets just for the tax deduction, resulting in expenditure you don’t need in your business.

Solution: Only buy what your business needs. New capital equipment can boost the productive capacity of your business and that can flow through into higher profits. If you need new equipment, make sure you make your purchase before June 30 to get an immediate deduction. The Federal Government has announced that assets up to $30,000 are immediately deductible, with businesses able to make multiple deductions under the scheme within the same tax year.

10. Not pre-paying expenses

Mistake: There are advantages to pre-paying expenses, but SMEs often leave it as long as they can, thinking they’re better off having the funds in their own bank account.

Solution: Anything you can pay prior to June 30 will enable you to get a deduction sooner. Evaluate which expenses you can pre-pay, such as insurance, subscriptions or interest to bring forward those deductions.